What is Harberger Tax & Where Does The Blockchain Fit In?

Harberger Tax is an economic policy that aims to strike a balance between pure private ownership & total commons ownership in order to increase general welfare of society. It helps ensure that property is more productively utilised by the society, resulting in an increase of overall economic productivity and general welfare of society. It keeps the power of the market, whilst reducing the inefficiencies in how property is currently allocated. At a relative cost to efficiency in investment returns, it reduces the prevalence of monopolies that exclude society from an asset’s wealth generating capabilities.

Citizens value their own property and pay tax on that value. A self-assessed tax.

At any point in time, anyone else can buy the property from you at that price, forcing a sale.

Investment efficiency is classified as the ability for an owner to invest in their property to increase its value. Because anyone can force a sale, under a Harberger tax model, it is less likely that someone would invest in their assets.

Allocative efficiency (in this context) is classified as the point where property is distributed to the extent that it is in the most productive hands. Deadweight loss is a net economic inefficiency in society that results from misallocation of resources (like setting prices too high or too low). This is especially the case in property ownership, exemplified by the bargaining problems put forth by Myerson & Satterthwaite.

The source of misallocation in all these examples is the same: the owner of private property will “hold out” for a price that the buyer may not be able to pay, leading to delay or a failed transaction even when the buyer can use the property more productively than the owner can.

It’s always in the interest for the seller to quote it higher than their lowest price they might consider selling it for. It’s also always in the interest of the buyer to quote it less than the highest price they are willing to buy it for. Depending on who makes the offer, in both circumstances, not having knowledge of the reservation prices leads to ineffective turnover of the asset, because of these bargaining problems.

With Harberger tax, the inability for asset owners to set high, monopolistic, hold-out prices (it’s costly to them personally) OR the ability introduce additional costs to bargaining (seller always sets the price), it more readily allows the market to allocate property to productive owners.

Harberger tax reduces investment efficiency at a gain in allocative efficiency of ownership. It represents “partial common ownership”.

It is estimated that due to the quadratic loss of monopolies in private ownership, a reduction in investment efficiency at the benefit of allocative efficiency, results in great benefits to welfare (and thus society overall).

In most calibrations Harberger taxation achieves 70 to 90 percent of the maximum possible allocative welfare gains and the investment losses erode only 10 to 20 percent of these gains.

Besides the more productive utilization of the assets, it also raises substantial additional revenue. In the paper, they cover various ways this new revenue can be utilised.

21st Century Economics

100 years ago, it’s estimated there existed just under 2 billion people.

100 years ago, after WW1, the world shed monarchies as its dominant form of governance. Democracy only became dominant in the 1990s.

The WWW is 30 years old.

In many ways, we are living in the grandest period of change in our collective history. A few generations ago, almost everything looked different. It has resulted in some extraordinary societal changes.

Worldwide extreme poverty is down drastically: from an estimated 80% in 1820 to less than an estimated 10% in 2018. Despite this astounding growth, we are however, we are facing rising inequality, growing climate change and impending technological unemployment.

Despite high growth in emerging countries, global inequality increased since 1980. The top 1% captured twice as much global income growth as bottom 50%.

Much of this inequality is due to transfer of public to private wealth.

Whilst the growth in the world economy result in a rising tide that lifts all boats (for the poorest of poor), it also resulted in increasing inequality. With technology increasingly providing more leverage (eg, a top tech company controlling ALL the cars on the road), it’s likely that inequality will continue to widen. This is particularly apparent in the global middle class, which experienced the least amount of growth in the last few decades.

There’s a fear that these trends won’t stop. Capital-owners will capture more growth than the rest. The technologically unemployed won’t be able to find new jobs when automation arises. Technological leverage will accrue its benefits to only a few. There’s a sense that the trajectories aren’t quite promising for most of society. Our recent “saviours”, the supposed “sharing economy” is giving access at reduced rates to new markets, but ultimately capturing most of its value into the hands of a few corporations on the West Coast of America.

Whilst this might not be inherently bad: our current economic models has indeed resulted in grand economic growth. And perhaps, even given the cost of it, holistically, it might still be the best that’s available to us. It can be argued that because we are improving the lives at net of the whole population, it’s fine if the 1% keeps reaping more growth than the rest of society.

How do we reduce the power of capital in widening this gap in equality? Progressive tax regimes have been recommended before and is cited as one of the reasons why Europe’s inequality has remained relatively stable.

What I like about Harberger taxes is that it presents a very fascinating alternative. Like UBI (a whole blog post by itself), it’s an idea that would result in more people having access to increased optionality. Whilst progressive taxation ensures that inequality doesn’t widen, it doesn’t really allow more people having access to wealth generation. Progressive taxation also relies more on an effective state to appropriately utilise the revenue in productive ways.

From Cadastre to CadAstra (to the moon!): Building New Economies Using Blockchains & Harberger Tax

In theory, Harberger taxes are very interesting. There are legitimate critiques about it. It feels like it is definitely worthwhile to explore & experiment with it. The problem is that in practice, despite political push back, it would be difficult to pass without more research.

For example, people kick back on the idea of there being “forced evictions” when you have to sell, the idea of have to self-asses constantly & whether this is regarded as “fair”. Much of this can be mitigated (as stated in the paper), but it ultimately these issues might not be that big a deal in practice. We tend to favour the status quo, and only perceive the negative in change.

One of the biggest issues raised initially was the lack of tools & technology to implement it. With modern technology, it provides us more options to try.

This all suggests that an important reason why Harberger taxation has not been used in the past is that without modern information technologies it would have been challenging to implement, would have required relatively low tax rates, and would have generated quite limited welfare gains. Conversely, we believe its benefits will grow in coming years. Our framework provides a way to understand and predict the coevolution of market technologies (produced by the private sector) and property rights (produced by the government).

Luckily, we are afforded to experiment with this on a new scale. It can inform us whether Harberger taxes are practical.

For example, the paper mentions the usage of a cadastre: a global record of property & its associated prices, which is perfectly suited towards something like a blockchain. This wasn’t the case in the 60’s at all when Harberger taxes was first proposed.

Additionally, blockchains are a ripe breeding ground for experimenting in closed-loop economies, because the on-chain, bearer assets can be enforced using only the ledger. This is particularly relevant in the new, growing arena of non-fungible collectibles, like CryptoKitties. Jacob Horne have explained before the value of there being continuous auctions in this realm: you would always be able to know the price someone would pay for your collectible.

We will see continuous auctions form on NFTs. Imagine Ebay, but you don’t have to actively list what you own to see the going price.

This is huge. We’ll have trustless, liquid markets where anyone can make an offer for what you own (even if you’re not actively selling).

You will know what the going price is for their unique asset whether you like it or not. You’ll know the buyer’s offer is legitimate since it’s signed, all you’d have to do is click “Accept”.

This is possible. Now. Instead of knowing the buyer’s price, it just shifts around to the seller.

The value that this also brings is the possibility for these closed-loop ecosystems to use the taxes to fund development, research or dispense it through novel redistribution mechanisms.

For example, as a novel distribution scheme, taxes can be deposited into a curved bond, allowing the bootstrapping of network effects and access to a communal pool of funds without voting. If you pay tax in a growing economy based on a curved bond, you are incentivized to keep growing it and not exiting immediately.

Starting from scratch, there’s even other possibilities: for example, I have an idea for a Harberger Pixel Map. Take a pixel map (like Reddit’s the Place), and derive ownership of it through Harberger taxes.

The Place

You set the price of your pixel. You pay a 2% tax on it. If you fail to do so, anyone can trigger a forced sale, where the pixel goes for sale in a reversed dutch auction.

Anyone can buy the pixel from you. You can change the colour to what you want.

Taxes are distributed to pixel owners as basic income for the art they collectively create.

What about the artwork generated by Artonomous, the autonomous artist? Not only does the autonomous artist then earn revenue from artwork it generates and sells, but also from the taxes.

The possibilities become even more extreme when you extend a blockchain’s coordination capabilities beyond just closed-loop economies into the real world.

What about utilising Harberger taxes to sell slots for your attention? Taxes are your basic income?

What about a Harberger taxation scheme for a community, where members can buy/sell access to a community? Taxes are basic income in the community?

On the furthest extreme, one could even opt in to a Harberger tax system for the real world. The tax benefits from more productive allocation are shared only by the participants who opt into it. The enforcement of this is done through willing to be slashed of a stake if one doesn’t conform to the group’s contract. This is done through a project like Delphi. This would only work if the cost of defecting is high. This ultimately means that the cost to opt-in, might be quite high. At the very least it doesn’t seem theoretically impossible to opt-in to a tax ecosystem like this. More exploration is needed.

Conclusion

Harberger tax is a fascinating economic model that trades off investment efficiency for allocative efficiency, resulting in large welfare gains. It is hard to implement in practice and the blockchain affords us the ability to question its validity and usefulness.

As you might have noticed in much of my writing, blockchains to me have always been about figuring ways it can be utilised to enable new forms of agency & empowerment in a world rapidly facing new & challenging economic, technological & political change. It provides so many opportunities to re-imagine how we work together and coordinate as a society. Curation Markets & Curved Bonding are examples where I wish to enable content creators & community self-determination. Harberger tax is another one of those options.

Perhaps it is just another naive theory that doesn’t work in practice. Opting in to these experiments on blockchains will allow us to study and understand it better. My gut feeling is that Harberger taxes will be widely utilised in the future.

I want to see a future where we experiment with new opt-in, n-sided contracts with one another in order to increase our own and each other’s collective welfare. As per Coase’s Theory of The Firm, reducing the transaction costs to coordinate allows us to form new organisations that create new wealth. Smart contracts & blockchains afford us this opportunity to build these new post-state collective coordination games. We can foresee a world where funds transparently flow towards competitive and effective ecosystems.

In these games, there’s a way out of the ails of impending social plights to come. We are already a bit late. Let’s get building.